Traditional capital accounted for 83% of the total market capacity in 2020 against 17% for alternative capital. The share of the latter was 6% in 2012.
A new development is that the traditional reinsurance capacity has grown steadily over the last three years while the level of alternative capital has remained more or less stable.
Evolution of reinsurance capacity: 2012-2020
In billions USD| 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 E | |
|---|---|---|---|---|---|---|---|---|---|---|
Traditional reinsurance capacity | 292 | 320 | 340 | 332 | 345 | 345 | 341 | 394 | 429 | 441 |
Alternative reinsurance capacity | 19 | 48 | 60 | 68 | 75 | 87 | 95 | 88 | 88 | 91 |
| Total capacity | 311 | 368 | 400 | 400 | 420 | 432 | 436 | 482 | 517 | 532 |
E : Estimation
Source : AM Best
For AM Best, only 82% of total capacity of the reinsurance market [4] is needed to meet current market needs, leaving the market with nearly 20% excess capacity.
In 2021, and probably in 2022, this excess capacity does not trigger a decrease in rates as it has in the past. In fact, the emergence of major systemic risks over the past two years (pandemic, climate change, cybercrime) has had a greater impact on rates than excess capacity.
Traditional reinsurance capacity
Traditional capacity, which has increased from 292 billion USD in 2012 to 429 billion USD in 2020, is expected to reach 441 billion USD in 2021.
Despite the heavy losses incurred during the last few years, traditional reinsurers remain strongly capitalized. The events that occurred in 2020, particularly, Covid-19 pandemic and the resurgence of secondary perils [5], have not deteriorated the market's capacity. On the contrary, new traditional capacity has been brought in, supported by:
- a general context of uncertainty and caution. Reinsurers prefer to hold more reserves than before in an attempt to support organic growth,
- strong net results,
- capital raising transactions undertaken by new comers (Vantage, Conduit Re and Inigo) and existing reinsurers,
- improved underwriting conditions and rate increases adopted since mid-2020.
For reinsurers, overcapacity does not affect market conditions. Moreover, newly contributed funds are not large enough to trigger a turnaround. The abundance of capacity, on the other hand, alleviates concerns about exposure to secondary perils and climate change [6].
Alternative reinsurance capacity
Alternative capital peaked at 95 billion USD in 2018 compared to 11 billion USD seven years earlier. After the 2017 natural catastrophe loss surge, capacity stabilized at around 88 billion USD in 2019 and 2020.
Forecasts for 2021, show a slight rebound of around 3.4%.
More cautious about their level of risk exposure, alternative market players are expected to total 91 billion USD in capacity. These include ILS [7] funds as well as other investment vehicles.
Non-life reinsurance: combined ratio
During the 2016-2020 period, the average combined ratio of non-life reinsurers stands at 102.4%. The market has been undergoing a decline in technical profitability since 2017 with combined ratios above 100% in the last four years. This downward cycle is sustained by natural catastrophe [8] losses.
After peaking at 110.3% in 2017 with a series of major hurricanes (Harvey, Irma [9] and Maria), this indicator, still above 100%, then improved before falling back to 101.9% in 2018 and 100.1% in 2019.
Greatly strained, the reinsurance market is facing the health crisis of Covid-19, which brings entire sections of the global economy to a halt. As a result, in 2020 the combined ratio deteriorated again by 4.2 points to settle at 104.3%.
In a further twist of fate, despite the tariff adjustments made in 2021, the underwriting results for the current year are not expected to improve too much due to the occurrence of unprecedented catastrophic events.
Reinsurance: return on equity (ROE)
For the industry as a whole, return on equity (ROE) reached 2.5% in 2020, while the average value has been set at 4.3% for the last (2016-2020) five years.
From a high of13% in 2013, ROE has only declined to a low of 0.1% in 2017. Supported by investment income, market profitability then improved to 9.4% in 2019 before falling back to 2.5% in 2020. The health crisis, which is putting pressure on reinsurers' reserves and encouraging the maintenance of low interest rates, is at the origin of this new decline.
